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New Public Sector Rules: Should I enter an Umbrella?

Q. Do I have to enter an umbrella company with the new IR35 inclusion rules for contractors in the public sector. My agency is claiming 20% for sick, pension & holiday pay and their fees …but I do not require these as can do this myself as my contract is short and I usually wait until year end to decide how much I can afford. Also will then take 20% approx in PAYE & NI. So I will be less 40% of original daily rate. Can I stay out of the umbrella scheme and what are the choices also where are the contingency for further development & training as a public sector contractors? Also what about employers NI? I don’t want to have to cover this now nor do I want to collect VAT? My contract is very short, 40 days from 1st April. What can I do to save my money for my period of unemployment as I don’t want to sign on.

A. Assuming you are currently outside IR35 and will be affected by the imminent changes to the Public Sector legislation, the need to exhaust other options will primarily be determined once the IR35 assessment tool is issued by HMRC this Thursday 2nd March. Whilst the initial disclosure was issued with the intent to prepare all Public Sector contractors for April 2017, we found the ambiguity and never-ending speculation to further scaremonger contractors and agencies alike. Having spoken to industry specialists and government officials, it has now come to light that not all Public Sector contractors will be affected by this new reform and there will certainly be room for manoeuvre for contractors to remain outside IR35.

Should the new reform result in you shifting inside the IR35 band, your options will be to either utilise the services of an Umbrella company or continue operating through your own Personal Service Company inside IR35.

The latter option may not in fact be an alternative for you if you are currently operating through an agency, as agencies tend to shy away from paying wages into a Personal Service Company payroll.

Now supposing you have the only option of utilising the services of an Umbrella company or your own agency, both will pretty much operate the same way with the only difference being the respective fee each will charge.

You mentioned that your agency deduct 20% of your earnings and tuck away as sick pay, this contribution of yours will be fully repayable to you if by the end of the contract you have not taken any time off sick, the same will also apply to holiday pay.

The pay as you earn and national insurance deduction is in fact 20% and 12% assuming you are within the basic rate band, needless to say, the portion of earnings deducted for the social security contributions is quite breathtaking especially when you factor in other deductions such as agency fees etc.

Staying out of the Umbrella option is an alternative only if your agency is handling your tax affairs, we have established above that operating through your own PSC or even as a sole trader is an unlikely option.

Whilst your contract duration is for a short space of time, you will be taxed at source on whichever route you opt for and therefore the only disposal income remaining will be your post tax earnings.

You only need to consider becoming VAT registered if you are expecting your turnover to reach the £83,000 threshold however you do have the option to make a voluntary registration. If you happen to already be registered for VAT, you have the option to de-register if your expected turnover will fall below the £81,000 threshold.

This answer is provided by Qdos Accounting.

By Troy Stevens


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2 thoughts on “New Public Sector Rules: Should I enter an Umbrella?”

  1. David Heel

    So my contract ended 24/2/17 and a new one sent to me for signing. I was due to leave and asked the end client if he required me to stay until Friday 3rd March to complete a handover.

    He said that he would require a handover so I signed the new contract as I needed to be payed up until the 3/3/17.

    On Monday 27/2/17 I tendered my resignation which was accepted by the Public body client but it was a totally different story with the agency with whom I have been with for 6 years.

    They have informed me that as I had signed a new contract on Sunday 25th February until August 17 I could not leave to take up my new position and they were also withholding my invoice until their legal department decided on a way forward.

    I informed them that the notice period was 5 days or 30 at the most and it was then they told me that my contract did not include a exit date. I have since checked my contract and cannot find an exit date. They have informed me that they will be seeking the lost revenue between February and August.

    The end client’s T&C’s state 5 days either way but the agency say 5 days from the client only so they have not disseminated the contractors side.

    I asked if I went to the end client and retracted my resignation and this was refused where would this leave me. Answer, in the same situation as I had instigated the situation by resigning.

    I am now trying to find a way forward as they are adamant they will not be transferring any funds to my account on Friday.

    So Check your contracts fully as I will be doing this in future.

  2. RobinE

    I’ve spoken to a few firms offering umbrella companies, yet none could tell me whether they could pay me without going through the payroll system. As it should be taxed at source, on 100% of the income. Where the money to pay the Employers NI? If the end client wants me to work within IR35, I’ll be working a 3.5 day week for 6 months to keep below the VAT & Income Tax Threshold.

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